Sustainability in practice: ratings, research and proprietary models

Understanding how and why individual ESG components can impact corporate performance, and consequently portfolio construction, security selection and risk management, is essential for mainstreaming sustainable finance. In addition to developing proprietary models and engaging directly with corporates, investors have been relying extensively on mandatory financial and non-financial reporting, external ESG metrics and specialised third-party assurance. These practices can differ significantly across regions, industries and companies. However, the increasing adoption of sustainability criteria conceals a series of common underlying hurdles. While ESG data has come a long way, investors acknowledge multiple challenges related to materiality, coverage, quality, reliability, timeliness, consistency and comparability. Action 6 of the Commission’s Action Plan for Financing Sustainable Growth is focusing on the role of credit rating agencies (CRAs), sustainability ratings providers (SRPs) and market research services, in particular issues around methodologies, transparency, independence as well as the dynamic between incumbents and new entrants.

What drives the take-up of ESG analytics, scoring and research? What type of approaches are being used by CRAs and SRPs across asset classes, corporates and investors? Is there a difference between active and passive asset management strategies? What actions should regulators and supervisors pursue in order to ensure the robustness of ESG assessments? Would a more prescriptive approach stifle innovation? How to enable the market research on SMEs, and avoid their under-representation in retail/institutional investment portfolios?